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Washington, D.C. (January 3, 2012)—A new book from the Center for Global Development (CGD) cuts through the hype and backlash surrounding microfinance and concludes that while tiny loans do not end poverty, the microfinance movement has scored respectable successes in building dynamic institutions that deliver useful services to millions. Poor people, after all, need loans, savings accounts, and insurance no less than the rich.

Due Diligence: An Impertinent Inquiry into Microfinance by David Roodman, a CGD senior fellow, provides a fresh and comprehensive account of the history and current use of financial services for poor people. It concludes with practical suggestions for improving the multibillion-dollar microfinance industry.

The book launch for Due Diligence will be held January 5, 2012, at 4:00 p.m. at the Center for Global Development.

“Microfinance has more than its fair share of myths, both positive and negative,” says Tim Harford, author of a Financial Times column, “The Undercover Economist.” “It’s a field in desperate need of cool, rational, and evidence-based analysis, and David Roodman has proved that he is singularly capable of providing it.”

Roodman wrote the book in the public eye, posting chapters as he completed them on the CGD website in his Microfinance Open Book Blog starting in February 2009. He also wrote hundreds of posts about the process of researching and writing the book, sharing his intellectual journey, his questions, and what he learned.

“Writing the book in public changed me as an author,” said Roodman. “And it let me do better what I would otherwise have attempted with the book alone: bring rigorous analysis of an important question to a wide audience.”

“This book is an invaluable contribution to understanding what may be the most celebrated development idea of our time,” says CGD president Nancy Birdsall. “It is trailblazing too in the way it was written. I am aware of no other fusion of old and new media quite like this one.”

Once seen as a powerful tool for escaping poverty, microfinance encountered a severe backlash over the three years Roodman was at work on the book. Recent headlines have included such phrases as “borrower revolt,” “doesn’t work after all,” and “suicide.” Due Diligence investigates the truth behind these conflicting claims with lively wit and unprecedented depth.

Roodman concludes that while financial services are no more likely to lift people out of poverty than clean water and electricity, the microfinance movement—which provided over 150 million loans worldwide in 2009—has built thriving industries that deliver valuable services to millions of poor people.

He further argues that the goal of microfinance should be to create self-sufficient institutions that offer credit in moderation, help people save and move money securely, and provide insurance that is practical for the poor.

Some of Roodman’s recommendations run counter to conventional wisdom. For example, while some in the industry believe that microfinance will fail unless it reaches the poorest people in society, Roodman warns against pushing loans to very poor people, who may easily become overburdened with debt.

Similarly, he urges less overall investment in microcredit, for fear of bubbles. Instead, he says, the microfinance industry should diversify into less risky financial services, such as savings, insurance, and money transfers, while tapping new technologies, such as cell phones, to revolutionize financial services for the poor.

Muhammad Yunus, who founded the Grameen Bank and won the 2006 Nobel Peace Prize for pioneering microfinance, calls Roodman “the most consistent and articulate analyst of microcredit in recent years.”

Financial journalist Felix Salmon says “Due Diligence is the microfinance book that grown-ups have been waiting for, as complex and fascinating as its subject.… Roodman brushes away the slogans and the oversimplified dogmas to uncover microfinance’s long history and multifarious present. It’s required reading for anybody who seeks to engage seriously with the questions of whether and how microfinance works. And best of all, it’s a pleasure to read.”

The book recounts that charitable loans for poor people has a long history, dating back at least to the 15th century. Modern microfinance began with the work of Yunus and the Grameen Bank in Bangladesh. With international attention and an influx of capital, the movement eventually spawned some 2,000 successful nonprofit and for-profit microfinance institutions around the world, with over 45 million loans in India and Bangladesh alone.

The industry evolved from small nonprofits to include large money-making firms which solved the profitability problem by serving the poor in bulk. In 2009, Roodman relates, the average microcredit client was served by an institution with 2.2 million borrowers, 9,000 employees, $730 million in assets, and operating profits equal to 16 percent of revenue.

However, in recent years the microfinance movement’s claims to reduce poverty and empower women have come under fire. Rigorous studies have found no discernible reduction in poverty among borrowers, at least over the first 12 to 18 months, and a spate of credit bubble crises have shaken confidence in the industry and among donors.

Roodman writes that despite these problems, which should not be glossed over, microfinance makes valuable contributions to development. Where else can you find philanthropy and foreign aid building an entire, self-sustaining industry delivering inherently useful services to poor people?

Sir Fazle Abed, founder and chair of Bangladesh-based BRAC, one of the world’s largest NGOs, says: “At a time when the pendulum of public opinion on microfinance is swinging from exuberance to cynicism, Roodman’s balanced, evidence-based assessment is a timely and seminal contribution. This is an essential read for practitioners, promoters, and critics of microfinance.”

Carlos Danel Cendoya, cofounder of Mexico’s high-profile Compartamos Banco, says that “Due Diligence is the result of years of rigorous, fact-based analysis and deep thinking of the type microfinance sorely needs. Anyone interested in the future of financial inclusion should read Roodman’s work.”

“This is a splendid book. It’s original and very smart. It’s an engaging read. Best of all, it displays a high order of intellectual honesty,” said Richard Rosenberg, a senior advisor at the Consultative Group to Assist the Poor (CGAP), a World Bank–headquartered research body and information clearing house for microfinance. “None of this is any surprise to those of us who have followed Roodman’s microfinance blog, which is the only one I never delete before reading,” Rosenberg added.

Notes for Editors:
Members of the media interested in attending the launch event should contact media relations coordinator Jessica Brinton by calling 202-416-4040 or emailing her at Jbrinton@cgdev.org. The book launch on January 5, 2012, at 4 p.m. is part of a collaboration between The MasterCard Foundation, CGAP, and the Center for Global Development to support the publication of the book.

David Roodman is a senior fellow at the Center for Global Development currently focusing on microfinance. He wrote Due Diligence through a pathbreaking Microfinance Open Book Blog, where he shared questions, discoveries, and chapter drafts. In 2011, Roodman ranked in the top 10 on the RePEc list of top young economists in the world. Roodman previously worked at the Worldwatch Institute and spent academic year 1998–99 on a Fulbright in Vietnam.

About the Center for Global Development

CGD works to reduce global poverty and inequality through rigorous research and active engagement with the policy community to make the world a more prosperous, just, and safe place for all people. As a nimble, independent, nonpartisan, and nonprofit think tank, focused on improving the policies and practices of the rich and powerful, the Center combines world-class scholarly research with policy analysis and innovative outreach and communications to turn ideas into action.

About CGAP

CGAP is an independent policy and research center dedicated to advancing financial access for the world’s poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors.

About The MasterCard Foundation

The MasterCard Foundation advances microfinance and youth learning to promote financial inclusion and prosperity. Through collaboration with committed partners in 48 countries, The MasterCard Foundation is helping people living in poverty to access opportunities to learn and prosper. An independent, private foundation based in Toronto, Canada, the Foundation was established through the generosity of MasterCard Worldwide at the time of the company’s initial public offering in 2006.